Easton district drops its swaps

Christopher BaxterOf The Morning Call

School officials in Easton took defensive precautions Tuesday to protect the district's financial standing amid the global economic crisis.

The school board voted to suspend one of two remaining swaps for three years, guaranteeing an up-front payment of at least $1.2 million. It also decided to terminate the second swap, and reissue all 2008 bonds at a fixed rate to defend against possible future market turmoil.

The district's move comes after Bethlehem taxpayers paid an extra $1 million when short-term interest rates skyrocketed in September. The Bethlehem Area School District has 75 percent of its total principal debt in adjustable-rate swaps, much higher than Easton.

"We weren't in a situation where we were overwhelmed by these things," said Scott Cramer of RBC Capital Markets, the financial firm that has handled the Easton district's debt management and swaps. "These were relatively simple moves that will save the district in the long run."

Layered on top of bonds, swaps are often used by government agencies to help fund capital projects and reduce interest payments. But the global market slowdown has left school districts, municipalities and counties with unexpected hefty costs.

The Easton district has received a net gain of $422,552 in the past year from its Constant Maturity Swap. By suspending that swap for the next three years, the district will receive at least an additional $1.2 million. School officials agreed to keep the up-front payment in an interest-accruing account to pay future interest costs should rates be less favorable when the swap resumes.

"The best thing we can do is let it sit and collect dust, and hope we come out of the dust in a good place," board member Kerry Myers said at the meeting.

District officials can revisit the suspension during the three years if the swap becomes more profitable, Cramer said.

The board also voted to authorize the termination of the second swap, which fixed $21.7 million of the 2008 Variable Rate Bond Series at 3.61 percent. While that remains a relatively good rate, the remaining $15 million carried a variable rate that fluctuated between 3 and 4 percent before jumping to 12 percent last week.

The district probably will pay around 5 percent interest by reissuing the bonds at a fixed rate, Cramer said.

Though that's higher than the average 3.65 percent budgeted by the district, he said, the difference will be offset by a lower-than-expected rate on the $21.9 million Delaware Valley loan. The district budgeted a 5.5 percent interest rate for those bonds, but locked in an average rate of 3.2 percent last week.

The board's decisions Tuesday should carry little to no cost in the current market, Cramer said.